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A Partnership Agreement May Limit the Community’s Interest in the Goodwill of the Company

In Iredale, wife’s divorce lawyer argued that the value of wife’s interest in her law partnership should include the value of the wife’s capital account and exclude any goodwill.  Wife testified that she held a minimal interest in the partnership and was not involved in firm management.  When wife became a partner, she was not required to buy into the firm’s accounts receivable, work in progress, or goodwill.  Wife’s divorce lawyer presented expert testimony that wife’s partnership interest contained no goodwill and should be solely measured by the capital account.  Wife’s expert also concluded that wife received reasonable compensation for her services and had not received excess compensation.  Husband’s divorce lawyer argued that wife’s interest in her partnership should include goodwill.  Husband’s expert analyzed the partnership by valuing its assets and multiplying it by the wife’s interest.  However, husband’s expert acknowledged that the partnership existed as an established national law firm prior to wife becoming a partner which demonstrated that the partnership had substantial goodwill at the time she joined the firm. The divorce court did not assign any goodwill of the company to the community and husband’s divorce lawyer appealed.

The Court of Appeal affirmed the divorce court by holding that the circumstances of each case, and each professional practice, vary and call for different methods of valuation. Here, the partnership agreement limited wife’s partnership interest to the value of her capital account and excluded accounts receivable, work in progress, and goodwill. The Court of Appeal agreed with wife’s divorce attorney and reasoned that because wife did not buy or otherwise acquire an interest in the accounts receivable, work-in-process, or goodwill and on termination, she would not receive any share of the partnership’s goodwill, the partnership’s goodwill was not a community asset to be valued or divided.

In re Marriage of Iredale & Cates (2004) 121 Cal. App. 4th 321